JOHN MCQUEEN HIGHLIGHTS THE IMPORTANCE OF CHOOSING THE LEAST RISKY LEGAL VEHICLE WHEN LAUNCHING A NEW BUSINESS.Solicitors advising clients on setting up a business for the first time should give careful thought to the most suitable legal format for their client's business operation, as well as to the organisation of their personal financial affairs.

Many business legal formats are badly organised and inapprop riate.

There are three basic ones:SOLE TRADERSThis is the most common legal business format and often the most sensible, especially for someone setting up a small new business.

If a sole trader is married then the spouse is not liable for the debts of that business.

The same applies to two unmarried people living together.The advantages of being a sole trader is that it is a simple, clear format and tax matters are easily dealt with.

Anyone setting up or running a business that involves little chance of financial loss should adopt this legal format.

Many people run a part-time business from home, for example, taking few business risks.

In such cases, it is sensible to operate as a sole trader.However, a sole trader who is running a business that involves real financial risks, such as a small builder with a large overdraft to finance building work, should consider an alternative format.

If things go wrong then a bankruptcy order may be made, in which case the sole trader might lose his or her share of any jointly-owned home.Many husbands and wives seem to think their home is safe in the event of a spouse's bankruptcy.

This is not so.

If a sole trader goes bankrupt the trustee in bankruptcy can force the sale of any jointly-owned property to realise the bankrupt's interest in it.If the matrimonial home is purchased in a spouse's name at the outset, the risk of losing the home is removed.PARTNERSHIPSTax allowances are given for each partner and each partner has legal ownership of any business assets.

For this sole reason solicitors sometimes advise bringing in the spouse as a partner.

However, this is absolutely the worst business format in most cases because of the joint and several liability entailed.If one partner goes off the rails and creditors decide to claim against all the partners the client's future in business will be bleak.

Clients sometimes leave a partnership and find later, when the business fails, that they are still liable for all its debts.Partnerships which run into financial trouble often turn out to be a legal nightmare for those involved.

The partnership format is thus generally an extremely dangerous one.LIMITED COMPANIESThe limited company business format is the most sensible format for an intended larger business, and is a good alternative to a partnership business.

So long as the limited company only obtains credit for the company then the personal assets of those who run and own it cannot generally be touched if the company becomes insolvent.Run sensibly, this is the ideal format for a risk-taking enterprise.

However, in practice, many directors of limited companies find themselves with a wide range of financial problems when a company fails.

Directors can be made liable for certain tax liabilities of the company.

They may also be liable to the liquidator of their company if they have borrowed from the company loan account.

Directors often draw loans from a company instead of wages, for tax purposes.

This can backfire if the company fails.In addition, banks and other financial institutions commonly ask directors to give personal guarantees on loans to the company.

Such guarantees, in effect, negate the limited liability benefits of a limited company.

If the company cannot pay these guaranteed debts then the homes and personal assets of the directors who signed the guarantees are at risk.Liquidators of insolvent companies may also sue directors they believe to be guilty of wrongful trading.If found guilty by a court, then such directors can be made personally liable for part or al l of a company's debts.

In addition they may be disqualified by the same court from taking part in the management of any future business for prescribed periods.-- DOV OHRENSTEIN CONSIDERS SOME OF THE MAIN ISSUES FOR CLIENTS POISED TO JOIN THE GROWING BAND OF UK FRANCHISEES.Newspapers are filled with advertisements from prosperous and experienced businessmen offering to share their successful ideas with inexperienced partners.

The expectation of quick profits derived from a famous brand and a ready made business system easily induces entrepreneurs into signing a franchisor's contract.Franchises dominate many retail sectors.

According to the British Franchise Association, turnover from franchises now exceeds £33.3 billion, yet the average initial outlay required is only £40,200.

Investing in a franchise is therefore a popular option for ambitious entrepreneurs with limited capital.Solicitors might only be contacted by prospective franchisees at a late stage in the negotiations.

So with clients often having to make decisions at short notice, solicitors need to be aware of potential problems in advance.

The issues raised will be primarily contractual, but if a dispute does arise solicitors should be in a position to make use of specialised knowledge, particularly of UK and EC competition law.General advice for potential franchisees is to exercise extreme caution before dealing with any new franchise operation.

Check that the franchisor has complied with the British Franchise Operation's Code of Ethical Conduct.

Holders of existing franchises should be contacted by prospective franchisees.

They are a useful source of advice and the client can also assess the calibre of person entrusted with the brand name by the franchisor.

Other franchisees will soon say whether the franchisor is a benign dictator acting for the benefit of all the franchisees or a despot intent on promoting its own interests.Initially, the client's primary concern is likely to be whether the franchisor's brand name will attract customers, therefore market research should be considered.

However, there are other many detailed questions to consider:DOES THE SCHEME PRODUCE AN ADEQUATE RETURN ON THE CAPITAL INVESTED?If there are large initial costs the agreement must be for a long enough period to enable the investment to be recouped and profit made.

The client is likely to rely on market and financial information produced by the franchisor, although forecasts will probably be subject to exclusion clauses and are unlikely to amount to warranties.

Nevertheless, the effect of exclusion clauses maybe limited by the requirement of reasonableness found in the Unfair Contract Terms Act 1977.

Also, the information provided by the franchisor will be potentially subject to the Supply of Goods and Services Act 1982 and is required to be compiled with reasonable care.

Despite the existence of prospective legal remedies, the prospective franchisee should be wary of figures which have not been independently audited.

It is advisable to consult an accountant to verify the claims.HOW MUCH DOES THE FRANCHISEE HAVE TO PAY THE FRANCHISOR?Some franchisors are not content to profit only from their declared management charges and commission fees.

Often franchisees are required to purchase supplies from the franchisor.

When similar items are available from cheaper sources or on better credit terms there is a disguised cost.

There is often minimal control on the prices that the franchisor can charge for goods.

While it is arguable that a franchisor who overcharges for supplies i s in breach of trust, there are legal and evidential difficulties in litigating such claims.

In appropriate cases Article 85 of the EC Treaty and the Block Exemption 4087/88 can be invoked to allow franchisees to obtain supplies from other sources.The client should find out what extra charges will be payable, such as those for advertising and consumable supplies, and when payment is due.

Some franchisees will pay for their own local advertising as well as providing funding for the brand's general promotion.

Enquiries should be made to find out how brand promotion is conducted and whether franchisees are consulted on the distribution of resources.IS THE FRANCHISEE SUITABLY QUALIFIED? Before entering an agreement the client should consider his or her own experience, the franchisor's requirements, and the extent of any training provided.

Good franchises are those in which the franchisor protects the brand's reputation by ensuring that only suitable candidates can have franchises.

Clients must give careful thought to the current franchise operations manual and should be told if it is subject to change.

Franchise agreements normally provide that the business must be operated strictly in accordance with the procedure set out in the manual.

The client should be informed that failure to comply may lead to termination of the agreement.IS THE FRANCHISEE ABLE TO SELL, RENEW OR CLOSE THE FRANCHISE?Check there is no absolute prohibition on assignment of the franchise.

Usually the right to assign is subject to conditions, and the client must be warned that it may be hard to fulfil these.

The right to renew is often subject to the franchisor's new terms and conditions, which can prove to be extortionate.

Where the client is not taking a sublease from the franchisor, his or her tenancy obligations will often continue beyond the duration of the franchise agreement.The client should not take the chance that the franchise may end, leaving him or her tied to an expensive lease.

The lease must therefore be flexible enough to allow for change of use of the premises as well as sub-letting or assignation of the property.ARE THE FRANCHISEE'S OTHER BUSINESS ACTIVITIES RESTRICTED DURING AND AFTER THE AGREEMENT?If the client is not intending to work full time in the franchise he or she may also wish to operate another business.In addition, after the agreement is terminated he may want to exploit the expertise he has acquired.

Although the agreement may include terms purporting to prevent such activities, the impact of such terms is limited by the common law and statutory provisions of restraint of trade.

Questions concerning the ownership of intellectual property and confidential information also arise.Where a franchisee is a company, its directors will normally be required by the franchisor to enter into non-competition covenants.

Such covenants can be affected by the provisions of the Restrictive Trade Practices Act 1976.

If the franchisor has failed to register the agreement in accordance with the 1976 Act a court may declare the restrictions on competition to be void and unenforceable.

The Competition Act 1980 imposes further controls on large franchise groups involved in anti-competitive practices.CAN OTHER FRANCHISEES OPERATE IN COMPETITION?While the client will be keen to maximise the size of any exclusive area agreement, care must be taken to ensure that it does not fall foul of either the common law doctrine of restraint of trade or of European competition law.

Excessive protection against competition will not be enforceable.SHOU LD A COMPANY BE THE FRANCHISEE?Although the majority of franchises are operated by sole traders and partnerships, the benefits of incorporation should be pointed out.Franchisees may still be required to give personal guarantees to their bank and the franchisor, but incorporation will protect them from other creditors if the business does not go to plan.

While solicitors are right to err on the side of caution and highlight potential problems, clients should also be encouraged by the fact that a NatWest Bank survey found that more than nine out of ten franchisees were making a profit and reported that they were happy with the relationship with their franchisor.The best franchises are genuine money spinners for all concerned, and fully reward the courage and hard work of those who take the risk.MAITLAND KALTON CONSIDERS HOW TO HELP A NEW BUSINESS GET THE BEST POSSIBLE DEAL WHEN TAKING ON LEASED PREMISES.Giving advice to small businesses on property issues is not unusual but involves special attention.

The more sophisticated business client rarely needs the level of hand holding demanded by the novice.Awareness of the particular needs of small businesses adds an important dimension to basic commercial property law advice and enhances the firm's reputation with local businesses and business intermediaries.Many a small business will start from home.

If this is the case, the role of the solicitor is limited.

But as part of a review of the client's legal position, it is important to explain how the client stands under any tenancy or lease, as well as under any mortgage, and the planning and tax laws.Whilst most businesses which run from home do so without addressing any of these issues, those involved must understand the risks -- their home may be in jeopardy although in some cases they may be able to persuade a landlord to consent to a part being used for business purposes.Businesses taking their first premises can rarely afford the fees of a surveyor to search and negotiate terms for suitable premises.

The solicitor should therefore review the client's position with a view either to formulating a proposal or renegotiating some of the principal terms agreed with the landlord/assignor.Simply to act on the basis of agreed terms may be sheer neglect.

The key issues to consider are:THE TERM OF THE LEASEThe general rule of thumb is that small businesses should be encouraged to take on the shortest commitment possible.

Ideally, they should take premises on 'easy in, easy out terms' where the rent is often inclusive and they enter into a short term or on-going agreement where they can get out at any time on giving notice of between one and six months.

Alternatively, a short lease should be considered, preferably with a tenant only right to break after one to two years.Always resist any qualification to the right to break.

If the right depends upon performance of the terms of the lease (especially where it is only exercisable at set dates), at very least make sure that obligation is limited so as to exclude all but material breaches.

If this is not done the right will probably prove to be unexercisable in practice.

Although this may have an impact on the rent a client can negotiate, it reduces potential losses if the business fails, as the majority do.

Clients will also need to consider what initial capital they need to put into the premises when assessing their requirements; if substantial sums are being put in, they will need to make sure they have sufficient time to get a return on that investment.RENT-FREE PERIODST hese typically reflect supply and demand and the cost of works to be done to put the premises into a habitable state.Solicitors are not valuers and it is vital to stress this to the client who should be advised to obtain an independent valuation.

Failing that, the client should be encouraged to enquire about similar properties in a similar location.RENT REVIEWSIdeally, the lease should not contain a rent review but if the client has taken on a longer lease or the landlord is itself locked into an obligation to sublet with identical review dates, there may be no choice.It is unlikely that the solicitor will succeed in negotiating upward and downward reviews but it is advisable to set some basic parameters for the review process at the proposal stage.

For example, if there is a stepped rent before the review the average rent is taken as the base rent for review purposes.REPAIRING OBLIGATIONSFor shorter leases one should rarely take on full repairing obligations but internal ones only.

Failing that, unless part of the deal is that the tenant has to improve the premises (in which case the works should be excluded on rent review except where the landlord is paying for them indirectly by granting rent-free periods to cover the cost), the client should try to limit liability by stating that it will not have to improve the premises.

A survey should then be recommended strongly, coupled with the preparation of a schedule of condition.Small business clients often wince at this advice but stressing its importance by illustrating what could otherwise happen will often serve to persuade them.'Full repairing' has extended in agents' jargon to cover contributions to the full repairing obligation of the landlord under service or maintenance charges.

In these cases, if an inclusive rent cannot be agreed, there are various options including, amongst others, a service charge cap (possibly index-linked), exclusion of certain or all major works (possibly involving a schedule of condition) or a fixed contribution throughout the term.Above all, the client needs to understand the full financial implications of taking premises, including the concept of dilapidation.LEGAL COSTSIn all cases the solicitor should try to persuade the landlord/assignor to bear its own legal costs (including any superior landlord's costs relating to the subletting or assignment only).

This is now almost the norm.Other matters to be considered include planning issues, 'signage' and alterations or additions requirements, special needs and compliance with building, fire and health regulations.

The client should be made aware either of the continuing liability under old leases or of the authorised guarantee arrangements for new leases for purposes of the Landlord & Tenant (Covenants) Act 1995.Acting for smaller businesses involves even greater sensitivity than usual to the subject of costs.

Rather than being forced to cut corners to keep costs down, it could be agreed that any excess over budget could be paid by instalments to give the business time to accumulate funds.

It has to be said that acting for small businesses can be extremely satisfying enabling the solicitor to become an integral part of the team.MICHAEL FRANKS EXPLAINS HOW TO DRAW UP CONTRACTS WITH CUSTOMERS AND SUPPLIERS FOR A NEW COMPANY.Before drawing up contracts establish exactly what the company does.

Find out how it is paid for the services or goods it supplies.Whether the contract is for the sale of goods or for the supply of services similar issues have to be considered:INTEREST ON LATE PAYMENTSThe contract must contain provisions entitling the company to charge interest on late payments otherwise the company will not be able to charge interest until legal proceedings are issued and a judgement is obtained in the company's favour.RIGHTS TO INTELLECTUAL PROPERTYIt is vital that the contract makes clear that all intellectual property rights are retained by the company and the customer is merely given a licence to use them.APPLICABLE LAWThe contract should provide that English law applies and that the parties submit to the jurisdiction of the High Court.

If the company intends to transact business with customers in the United States, a provision which provides for disputes to be settled by arbitration in London should be considered as this can help to deny USA courts jurisdiction and thus avoid American punitive damages.WHEN TITLE TO THE GOODS PASSESThe Sale of Goods Act 1979 as amended by the Sale and Supply of Goods Act 1994 (SOGA) lays down rules for determining the parties' intentions.

However if the contract expresses a clear intention this will override the statutory scheme.

It is worthwhile including in the contract a reservation of title clause.

This preserves the seller's title to the goods if payment has not been made by the buyer.

These clauses are the subject of frequent litigation and it is essential to use an up-to-date precedent to ensure that the clause is valid.IMPLIED TERMS AND EXCLUSION CLAUSESSection 14 of SOGA implies the following terms into contracts for the sale of goods in the course of a business: that the goods are of satisfactory quality and that if the buyer makes known to the seller the purpose for which the goods are bought, that the goods are reasonably fit for that purpose.

If a purchaser buys as a consumer, which is defined by s 12 of The Unfair Contract Terms Act 1977 (UCTA) as where:-- the seller makes the supply in the course of a business, and-- the buyer does not make the contract in the course of a business, and-- if the contract is for the supply of goods, those goods are of a type ordinarily supplied for private use or consumptionthen the above implied terms as to quality and fitness can not be excluded (see s 6 of UCTA).

If the sale is not to a consumer then these implied undertakings can be excluded by reference to a contract term but only in so far as that term satisfies the requirement of reasonableness.By virtue of s 13 of the Supply of Goods and Services Act 1982, there is a term implied in a contract for the supply of a service where the supplier is acting in the course of a business,that the supplier will carry out the service with reasonable care and skill.European Union law also affects contracts.

Council Directive 93/13/EEC has been implemented in English law as the Unfair Terms in Consumer Contracts Regulations SI 1994 No: 3159.

All unfair terms in a contract for the supply of goods or services to a consumer which were not individually negotiated are not binding on the consumer.It is still possible to rely on exclusion clauses in contracts with business customers but only to the extent that it is reasonable (see s.2 and s.3 of UCTA).

A case which illustrates this is St Albans City And District Council v International Computers Ltd (ICL) [1994 ] TLR 579 (first instance) [1996] TLR 500 (CA) This case concerned a company which had written software for a local authority.

As the local authority had merely been given a licence to use the software the court held that the software was not goods within the statutory definition.

Theref ore there were no statutory implied terms as to fitness or quality.

The court considered even if there was no express term in the contract, common law would imply a term that the program was reasonably capable of achieving the stated purpose.

The second question considered was whether the software company could rely on an exclusion clause limiting its liability to £100,000.

The judge at first instance held that it was unreasonable to rely on the clause and it was therefore not effective.

The decision was based partly on the fact that ICL had greater bargaining power than the local authority and had insurance cover of £50,000,000 worldwide.

Thus in drawing up contracts care must be taken to consider the position of the company so as to ensure the contracts match its circumstances.This article has looked at the the law with regard to drafting a contract for customers but the same considerations should apply in reverse to the company's contracts with its suppliers.